Hello. I’m hoping for some suggestions on making the best of the tax situation I will face for a year, or possibly two years.
-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well).
-I pay a flat amount of Italian tax under Italy’s forfait system.
Consequently, I can make only very limited use of my Italian tax for credit against my US tax obligations on my earned income.
Other than cash in Italy, all of my investment assets are held in US-domiciled ETFs and mutual funds in accounts in the US and Ireland (the portfolio is approximately 75/25 stocks/bonds, and 75/25 US/ex-US among the equities)
I would appreciate any suggestions on getting some mileage from my potential US foreign tax credit. It seems that taking capital gains (from accounts outside Italy) should work (but that means paying incremental NIIT). Replacing US-domiciled investments with (non-PFIC) investments outside both the US and Italy also seems that it should work (other than paying NIIT), but I’d appreciate any suggestions on identifying a satisfactorily diversified portfolio of third-country stocks not subject to additional taxes (or even feedback about the degree to which that’s feasible).
Thanks in advance.
US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
I am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Thanks, but after many thousands of euros of advice, I am convinced it’s true for my circumstances.halfnine wrote: ↑Tue Oct 26, 2021 12:29 pmI am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
- typical.investor
- Posts: 5245
- Joined: Mon Jun 11, 2018 3:17 am
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
I too don't understand why work performed in Italy is US sourced.EddyB wrote: ↑Tue Oct 26, 2021 12:47 pmThanks, but after many thousands of euros of advice, I am convinced it’s true for my circumstances.halfnine wrote: ↑Tue Oct 26, 2021 12:29 pmI am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
The IRS says as much:
If you are in Italy when the services are performed, why would the US claim that at US sourced?The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.
I suspect the euros you paid for advice were perhaps to someone who doesn't know the IRS stance. If you are working for a US company who is paying you as a local US employee but making you work in Italy, then perhaps you need to negotiate the tax burden in your contract.
I don't mean to argue, I just don't understand.
https://www.irs.gov/individuals/interna ... ice-income
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Thanks, I appreciate you reading, but rest assured that the quote from the IRS has zero to do with my circumstances. The expertise of the tax advisors on this is unimpeachable and I have no interest in violating forum policies by soliciting any legal advice on that topic.typical.investor wrote: ↑Tue Oct 26, 2021 11:51 pmI too don't understand why work performed in Italy is US sourced.EddyB wrote: ↑Tue Oct 26, 2021 12:47 pmThanks, but after many thousands of euros of advice, I am convinced it’s true for my circumstances.halfnine wrote: ↑Tue Oct 26, 2021 12:29 pmI am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
The IRS says as much:
If you are in Italy when the services are performed, why would the US claim that at US sourced?The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.
I suspect the euros you paid for advice were perhaps to someone who doesn't know the IRS stance. If you are working for a US company who is paying you as a local US employee but making you work in Italy, then perhaps you need to negotiate the tax burden in your contract.
I don't mean to argue, I just don't understand.
https://www.irs.gov/individuals/interna ... ice-income
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
I'll take your word for it. There are many ways these things can be setup that shift tax from one country to another. I would just say it is less common, hence my initial question.EddyB wrote: ↑Tue Oct 26, 2021 12:47 pmThanks, but after many thousands of euros of advice, I am convinced it’s true for my circumstances.halfnine wrote: ↑Tue Oct 26, 2021 12:29 pmI am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
As to how to mitigate taxes recovered in the other direction. Unfortunately, I can't be of much help as that is going to be very Italian specific. It looks like you have a general understanding already of the relevant problems (PFIC, US domiciled, Ireland domiciled, etc.). OTOH, the only thing in addition could be investing via futures or options instead but anytime I headed down that rabbit hole the relevant laws became even less clear. And don't forget about exchange rates shifting from the time of purchase until redemption which can impart gains in one country and potential losses in another often making taxes paid harder to recover as well.
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Thanks, but I’m not sure I understand the suggestion. I know nothing of the tax treatment of futures or options. The amount of my Italian tax on non-Italian income is fixed, so other than avoiding Italian-source income (aside from capital gains, which are Italian-source for purposes of the Italy-US treaty, but not subject to incremental Italian tax under the forfait system), I hadn’t considered there to be any Italian-specific issues (although I suppose there may be some treaty advantages with countries that don’t impose withholding taxes on Italian residents).halfnine wrote: ↑Wed Oct 27, 2021 2:46 amI'll take your word for it. There are many ways these things can be setup that shift tax from one country to another. I would just say it is less common, hence my initial question.EddyB wrote: ↑Tue Oct 26, 2021 12:47 pmThanks, but after many thousands of euros of advice, I am convinced it’s true for my circumstances.halfnine wrote: ↑Tue Oct 26, 2021 12:29 pmI am not convinced that the above is necessarily true. Income is normally taxed in the country it is performed. If you are performing the work while in Italy most likely it is Italian-sourced.EddyB wrote: ↑Tue Oct 26, 2021 10:07 am ...-I am an Italian tax resident. I’m subject to US taxes, too, as a citizen, and in the top bracket.
-None of my income is Italian-source income.
-More than 80% of my earned income is US-source income (the rest is sourced from a mix of other countries, and I pay some taxes in those countries as well)...
As to how to mitigate taxes recovered in the other direction. Unfortunately, I can't be of much help as that is going to be very Italian specific. It looks like you have a general understanding already of the relevant problems (PFIC, US domiciled, Ireland domiciled, etc.). OTOH, the only thing in addition could be investing via futures or options instead but anytime I headed down that rabbit hole the relevant laws became even less clear. And don't forget about exchange rates shifting from the time of purchase until redemption which can impart gains in one country and potential losses in another often making taxes paid harder to recover as well.
- Tinkerer-in-Chief
- Posts: 85
- Joined: Mon May 25, 2020 4:20 pm
Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Sounds to me like your issue is with Italy and/or the specifics of the Italy-US tax treaty not relieving you from double taxation in your specific circumstances?
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Re: US citizen abroad—foreign tax unavailable for US credit/Italian forfait tax
Right, the treaty does not relieve me of double taxation on my income from work. (I'm not sure it makes sense to say that's an issue with Italy or with the US, but I certainly see it as an issue with the treaty. As an aside, I understand that more recent US treaties and the current model OECD treaty do avoid the double taxation that arises in my circumstances.)Tinkerer-in-Chief wrote: ↑Wed Oct 27, 2021 7:59 am Sounds to me like your issue is with Italy and/or the specifics of the Italy-US tax treaty not relieving you from double taxation in your specific circumstances?
The fixed-amount forfait tax is the least expensive solution for me, but either way I have all this foreign tax (from a US perspective) and not much foreign income to allow me to use the potential credit. So I know that if, for example, I can shift dividend income from US sources to third-country sources that don't face a home-country withholding tax, that income would essentially become tax free for me (except for the NIIT). But I would love additional suggestions.